Six key risk areas merit attention in 2013 audit cycle

Auditing of internal control over financial reporting, a topic that
has received a lot of attention from the PCAOB this year, is among the
key risk factors for the 2013 audit cycle, according to a new Center
for Audit Quality (CAQ) alert.

The alert
describes six key areas of potential risk in auditors’ work. Many of
the areas have been the subject of recent PCAOB reports. The six areas are:

1. Internal control over financial reporting. The
PCAOB issued an
audit practice alert in October on applying board standards to audits
of internal control over financial reporting. In December 2012, the
PCAOB issued a
report on common problems to avoid in audits of internal control over
financial reporting. The CAQ report summarizes areas of focus in the
October audit practice alert. “Understanding the flow of transactions
and identifying the risks of material misstatement—including the types
of potential misstatements that can occur and the likely sources of
those potential misstatements—is necessary for the auditor to select
appropriate controls to test and to evaluate whether those controls
adequately address the risks,” the report says.

2. Professional skepticism. The requirement for the
auditor to exercise professional skepticism was the topic of a PCAOB audit practice
alert in December 2012. Auditors should maintain a questioning
mind and have the confidence to challenge management representations
after gathering and evaluating appropriate evidence, according to the
CAQ report.

3. Engagement quality review. Earlier this month, the
PCAOB released a
report advising audit firms to take steps to make sure that engagement
quality reviews identify the audit deficiencies they are meant to
detect. The CAQ report advises the engagement quality reviewer to
carry out responsibilities with objectivity and application of due
care, with the firm appropriately addressing the reviewer’s findings
before issuing the audit report.

4. Accounting estimates, including fair value
estimates. When evaluating how reasonable an estimate is,
auditors normally focus on inputs and assumptions that are significant
to the estimate; are sensitive to variations; deviate from historical
patterns; and are subjective and susceptible to misstatement and bias,
the CAQ report says.

5. Substantive analytical procedures. Although
substantive analytical procedures may be effective tests for relevant
assertions related to certain accounts, these procedures may not
always be effective in providing the appropriate level of assurance,
according to the CAQ report.

6. Inaccurate or omitted disclosures. Auditors should
communicate to management or the audit committee, as appropriate,
whether the financial statements are presented fairly in all material
respects, in conformity with the applicable financial reporting
framework, the CAQ report says.

The CAQ, which is affiliated with the AICPA, plans to update the
alert at least annually.

TAX NEWS

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